Government policies and politics likely to drive markets in 2013, says BNY Mellon

Markets in 2013 are likely to be heavily affected by government policies and politics, according to the Global Market Outlook from BNY Mellon Investment Management.

Policy makers will be faced with the challenge of maintaining stability, while attempting to stimulate economic recovery, the report says.

The outlook is the annual summary of insights from BNY Mellon's investment boutiques, focused on the important investment trends expected in the coming year.

Among the key factors that could determine market direction is whether European policy makers can resist domestic pressures and develop coordinated actions to tackle the region's main challenges, says Ivo Batista, portfolio manager from the BNY Mellon Investment Strategy & Solutions Group (ISSG), which participated in the report.

"Also of high importance is whether the divided US government can avoid the fiscal cliff and take actions that protect businesses and consumers from a wave of tax rises and government spending cuts," he says.

If the eurozone and the US can surmount these problems, Batista says investors are likely to take on more risk and send equities higher and safe haven bonds could suffer. However, ISSG warns that failure to address these issues could lead to a spreading of the eurozone crisis and possibly send the US into recession.

Most likely, though, ISSG says uncertainty will remain high in developed markets, leading to slow growth. This could have a potentially positive impact on emerging markets equities, real estate, corporate and emerging markets debt and absolute return strategies, says Batista.

Another concern about the impact of policy was voiced by Newton, one of the BNY Mellon investment boutiques participating in the Global Market Outlook.

"When policy is deliberately designed to distort markets, it may be more challenging to identify attractive valuations," says James Harries , investment manager, global funds, Newton. "Therefore, we believe it is correct to remain cautiously positioned."

One factor that will help those investing in emerging markets is the rapidly growing size of the emerging markets corporate debt market, according to Insight Investment, another BNY Mellon investment boutique participating in the outlook.

"One of the main reasons for investing in emerging market government bonds over the last 20 years has been that improving credit quality would lead to yield compression in relation to developed markets," says Colm McDonagh , head of emerging market fixed income, Insight Investment. "We believe that this structural shift will be replicated in the corporate bond markets."

"We believe that loans and bonds issued after the financial crisis that have proven resilient in the face of modest global growth can offer attractive yields with only a modest risk of default-related loss," says Simon Perry, managing director, business development, Alcentra.

Overall, the BNY Mellon Global Market Outlook notes that investors increasingly are focused on managing risk, ranging from counterparty and liquidity risk to systemic risks such as inflation and interest rate fluctuations. In the relatively low-return environment that is likely to characterize the coming year, minimising losses through effective downside protection will be an important consideration, according to the report.